Chapter IV

Consistent with the priority of protecting the lives, property, and livelihood
of US citizens at home and abroad, the United States has a fundamental strategic
interest in supporting democracy and free markets around the world. These are
critical factors underpinning global political and economic stability. Increasing
worldwide criminal activity and the growing power and influence of organized
crime groups are significant threats to democratic institutions and free market
systems in many countries and regions. Emerging democracies engaged in wide-ranging
reforms to meet these objectives, including the former Soviet Union and Eastern
Europe, are most vulnerable. Organized crime threatens democratic and free market
systems, as well as vital US national interests, by:

Increasing crime and societal problems. Theactivities
of organized crime groups undermine societal values, lead to increased crime
rates, and raise social expenditures. Crime groups seek to establish and enlarge
local markets for drugs and other illicit contraband that earn substantial
profits, which contributes to police corruption and street crimes. The social
consequences of these activities can be severe; they include drug addiction,
violence, property and financial fraud crimes, decreased respect for legitimate
authorities, and increased medical and social welfare costs.

Corrupting public officials. Although criminal groups rarely
organize politically, they can and do gain considerable power over politicians
and government officials through corruption and the economic influence they
exercise. Criminal groups cultivate and rely on corrupt political elites,
government officials, and law enforcement and security personnel to protect
their operations and to provide cover for expanding their activities, often
into the legitimate economy. They use their leverage to protect their illicit
operations from public scrutiny and law enforcement pressure; to push for
legislative and administrative regulations favorable to their criminal business
interests; and to gain insider access and information to government economic
strategy and plans that give them an unfair advantage over legitimate business
competitors.

Compromising the integrity of democratic institutions. Corruption
of public officials inevitably erodes the integrity of democratic institutions,
including legislatures and judiciaries. Criminal organizations attempt to
manipulate political and legal systems to their advantage. They use illicit
proceeds to help fund the campaigns of preferred candidates or to buy votes
in the legislature in efforts to protect their safety, freedom, and criminal
operations. Criminal influence in the legal system may short-circuit law enforcement
investigations, preempt prosecutions, prevent convictions, or preclude long
sentences. Damage to the integrity of democratic political and judicial institutions
undermines their credibility and erodes public support for democracy.

Penetrating the legitimate economy. Through investments in
legitimate enterprises, criminal organizations can gain substantial interests
in, or even control over, critical sectors of the national economy. Criminally
controlled or influenced businesses have ready access to considerable amounts
of interest-free capital to invest in productive enterprises, an advantage
legitimate businessmen do not have. Such unfair competition may put legitimate
business enterprises at a competitive disadvantage. Criminal groups tend to
invest more in high-volume cash-flow businesses that provide good cover for
money laundering or contraband smuggling. Business enterprises influenced
or controlled by criminal groups also put them in position to "steal"
legitimate government and business revenue. Moreover, companies controlled
by organized crime frequently create cost overruns or demand kickbacks in
sectors such as public works projects.

Damaging the credibility of banking and financial institutions.
The use of banks and financial institutions to launder money and for other
illicit financial transactions undermines their credibility. Poorly capitalized
banks established by criminal organizations weaken the banking system and
may increase the likelihood of a major domestic financial crisis. A weakened
banking system increases the danger of domestic liquidity crises and can magnify
the impact of foreign financial shocks on the economy. These developments
can undermine confidence in a country's financial system, leading to extensive
capital flight and depriving the country of investment resources. If the financial
system is closely integrated into global financial markets, the risk of contagion--the
crisis spreading to other countries-- increases.

Undermining support for democratic and free market reforms.
In countries with weak or developing democratic institutions or transitioning
economies, like Russia, the NIS, and several in Eastern Europe, the intersection
of organized crime with corrupt political elites can erode the public credibility
of reforms and prevent democratic and free market systems from being consolidated
and institutionalized. The general public feels it has no stake in political
and economic reforms when reforms appear to benefit organized crime, unscrupulous
businessmen, and corrupt politicians and government officials, rather than
aiding citizens. Rising crime and societal problems intensify public disillusionment.
Loss of faith in a newly democratic government's ability to cope with the
power and influence of criminal networks and corrupt officials may result
in stronger political support for antidemocratic hardliners.

Increasing power and influence of criminal organizations over political and
economic structures may cause some countries to become "safehavens"
where criminals can operate with virtual impunity. Criminal groups rely on safehavens
as staging or transit areas for moving illicit contraband--particularly drugs,
arms, and illegal immigrants--and for laundering, hiding, or investing their
illicit proceeds. They also use these countries' financial and commercial sectors
to arrange illicit financing of criminal activities and to broker prohibited
transactions, including those for regulated and proscribed materials and technologies
of interest to states of concern or terrorist groups. Countries that limit extradition,
do not recognize the relevance of some US laws, or that have no legal statutes
to deal with some criminal activities are often home to criminals seeking to
evade justice in the United States and other countries their criminal acts victimize.

In some cases, state-sanctioned criminality and corruption may be so corrosive
that the country itself has become a "kleptocracy." Rather than serve
the public interest, the top leaders in such countries use the resources of
the state solely to enrich themselves and keep themselves and their cronies
in power. Ruling their countries as virtually a personal business enterprise,
kleptocratic leaders exploit the most profitable areas of the national economy
for personal gain, often resulting in losses for the state treasury and sometimes
impoverishing the country. Gross corruption aimed principally at enriching the
political leadership leads to distorted economic decision making that weakens
a sound economy. Kleptocratic governments also set the stage for social and
political upheavals.

Nigeria under Abacha, Zaire under Mobuto, Indonesia under Soeharto, and
the Philippines under Marcos are examples of kleptocratic states. All of these
leaders used their authority to exploit their countries' economic resources
for personal gain and demanded sizable kickbacks as the cost of doing business.
They amassed fortunes worth billions of dollars, but also sowed the seeds
that led to their downfall.

Unconstrained criminal activity may so corrupt and compromise the integrity
of law enforcement and other government institutions that a country becomes
a "failed state" incapable of meeting many of the accepted standards
and responsibilities of sovereign control over its territory. In failed states,
government institutions responsible for law enforcement, maintaining public
order, or regulating the financial sector have broken down to such an extent
that they are unable to maintain rule of law or to develop sufficient political
motivation to act against criminal groups and activities operating in the country.
Their governments are unable or unwilling to fulfill international obligations
that would help prevent their countries from becoming major bases for global
crime. The failure of institutions to fulfill the public responsibilities expected
of them and any substantial breakdown of the rule of law may lead to significant
economic deterioration and political unrest that threatens both internal and
regional stability.

The international scope of the global crime threat places a premium on bilateral
and international cooperation to prevent organized crime, drug trafficking,
and terrorist groups and other criminal networks from establishing secure bases
of operations. Without effective law enforcement throughout the international
community, criminals will continue to threaten US interests, as well as those
of other democratic and free market countries, simply by conducting their activities
from, and through, those jurisdictions where law enforcement is weak. The absence
of effective law enforcement or political willingness to grapple with the problem
in countries that are safehavens or failed states precludes effective counterdrug
and law enforcement cooperation with the United States and other countries,
stymies US efforts to enhance international measures against money laundering,
corrupt business practices, and IPR violations, and complicates broader US political
and security interests.

Increasingly, however, many governments in countries criminals are exploiting
as safehavens are coming to realize the far-reaching consequences of international
criminal activity in their countries. In particular, in an increasingly global
economy where any one country's economic growth and prosperity are to a significant
degree dependent on international trade and commerce, more and more governments
recognize that criminal activity can undermine the credibility and competitiveness
of their country's financial and commercial sectors, which is bad for business
and the economy.